What does the short-run Phillips curve illustrate?

The short-run Phillips curve illustrates the inverse relationship between inflation and unemployment. This concept suggests that, in the short run, when inflation rises, unemployment tends to decrease, and when inflation falls, unemployment tends to increase. This relationship is based on the premise that higher demand in the economy often leads to higher prices (inflation), which, in turn, can lead to firms hiring more workers to meet increased consumer demand, thereby lowering unemployment rates.

Understanding this relationship is crucial for policymakers. For example, if an economy is experiencing high unemployment, policymakers may implement measures to stimulate demand, which could lead to higher inflation. Conversely, if inflation is too high, strategies to restrain demand could result in higher unemployment. The short-run Phillips curve captures this trade-off that policymakers face, highlighting the dynamic between economic activity, inflation, and unemployment in the short term.